Best Practices: Receivable, Credit, and Collections

Accounts receivable is among the largest and most liquid assets on the books of most companies. A properly managed accounts receivable portfolio can expedite cash flow and support corporate cash requirements. The ultimate goal of accounts receivable: to increase working capital. Companies have traditionally viewed accounts receivable as a basic function. They are beginning to realize, however, that improving the process can lead to significant financial gain for the company. Fewer outstanding account balances mean fewer bad-debt write-offs -- and enhanced profitability. As companies that apply best practices seek to wring the most efficiency from their accounts receivable process, they constantly evaluate their systems and procedures from all angles. Not only do they explore technological innovations, they also scrutinize the business decisions that form the foundation of each process. Companies dealing with commercial accounts typically

have fewer customers with larger invoice amounts, while companies dealing with consumer accounts interact with an increased volume of customers and smaller invoice amounts. The basic processes in the accounts receivable function, however, remain the same. Although this report refers primarily to commercial accounts, it includes consumer references as appropriate. The three basic processes that make up the accounts receivable function are: Remittance processing -- including payment methods and automated processing. Credit management -- including communication of credit policies, credit checks and approvals, and credit maintenance. Collections -- including methods to monitor and motivate internal and external collections agents, collections techniques, and technology. Customer service plays a key role in each of these processes. In fact, timely collection of receivables depends a great deal on customer satisfaction, which essentially represents a gauge of the importance a company places on customer service. To that end, best practices companies incorporate a customer-focused

approach into each of the three basic accounts receivable processes. Overview The earliest of business transactions did not include an accounts receivable component. In those days of direct barter, the sales process required no credit checks; vendor and buyer simply exchanged goods or services on the spot. Much has changed since then. The evolution of credit represents one of the most seminal changes. Not only has credit left an indelible imprint on modern business, it has also spawned the accounts receivable function. Today, accounts receivable plays a vital role in the overall health of a company; documented evidence has confirmed that a well-managed portfolio of accounts receivable can boost cash flow and expand working capital. Consequently, successful companies continually seek new ways to improve their accounts receivable function. Best Practices Note: Arthur Andersen has studied the leading companies that are high performers in the process of accounts receivable. It has also tapped the knowledge of experts, consultants, and industry leaders. The insights Arthur Andersen has gained from

these extensive studies are the focus of this executive summary. No company can force its customers to pay their bills. Companies can, however, take a number of steps to ensure payment. Successful companies leverage cash flow with effective receivables management. They recognize that fewer outstanding account balances mean fewer bad-debt write-offs -- and enhanced profitability. A discussion of the best practices used by leading companies to effectively manage their accounts receivable follows.